EVALUATION OF PROCUREMENT SYSTEMS

FOR BOT INFRASTRUCTURE PROJECTS IN ASIAN COUNTRIES

TO Nam Toan, Kazumasa OZAWA

University of Tokyo

ABSTRACT: One of the issues to successfully apply the BOT project is that must have an adequate pro-
curement strategy or procedure. Differently with traditional projects, procurement procedures for BOT pro-
jects will be influenced by a variety of factors, including the host country’s existing legislation governing
public procurement of construction work, internationally accepted rules for public procurement, the business
environment, the overall infrastructure policy and the nature of the particular BOT project. The purpose of
this paper is to compare the practical implementation of BOT competitive procurement procedure in two se-
lected Asian countries, Hong Kong and Philippines, which have some successful implementation of competi-
tive tendering for BOT projects. The findings from the comparison would be helpful for other countries
when formulating or revising the BOT procurement systems.

KEYWORDS: Evaluation, Procurement, BOT

1. INTRODUCTION procedures for BOT projects will be influenced by a

In the mid-1980s, many Asian countries turned to
privatization of infrastructure to overcome problems
which threatened to constrain economic growth.
Getting private sector management and capital into
transport, power, water and sewage, and telecommu-
nications services, was seen as a way of obtaining
and maintaining infrastructure more quickly and
more cheaply than traditional, state-led methods.
Various privatization methods such as corporations,
public flotations and straightforward sell-offs of
state-owned enterprises, became a popular option in
Asian countries. One important approach for build-
ing new infrastructure facilities was the
Build-Operate-Transfer (BOT) concept (Handley
1997).
One of the issues for successful BOT scheme is to
have an adequate procurement strategy or procedure.
Differently with traditional projects, procurement
variety of factors, including the host country’s exist-
ing legislation governing public procurement of con-
struction work, internationally accepted rules for
public procurement, the business environment, the
overall infrastructure policy and the nature of the
particular BOT project (UNIDO 1996).
In order to formulate an efficient procurement
framework for BOT projects, several researches
(Zhang 2004, 2005; Kumarawamy and Zhang 2001)
as well as guidelines (UNIDO 1996, WB 1998) in-
dicate that the competitive tendering system is suit-
able method to improve the efficiency of procure-
ment systems of BOT projects.
The experiences of Asian countries indicate that they
develop the procurement systems of BOT projects
based on the trial-and-error exercises (Kumaras-
wamy et al. 2002). This suggests the usefulness of
learning from the successful “trials” so as to mini-
mize any further “errors” in developing the future
procurement systems of BOT projects.
The purpose of this paper is to compare the practical
implementation of BOT competitive procurement
procedure in two selected Asian countries, Hong
Kong and Philippines, which have some successful
implementation of competitive tendering for BOT
projects.
project could be provided through three forms of
solicitation: direct negotiation, competitive tendering,
or unsolicited proposals. The competitive tendering
is required for the projects that have more than one
bidder participate in the case of solicited proposals,
or more than one proposal for the same or similar
project in the case of unsolicited projects.
Project Identification

2. BOT COMPETITIVE PROCUREMENT

PROCEDURE Creation of a procurement
committee

Based on the basic procedure for procuring BOT

projects as guideline of UNIDO (1997) and competi- Preparation of tender
documents
tive tendering process of BOT projects introduced by
Tiong and Alum (1997), the BOT competitive pro-
curement procedure is shown in Figure 1. Pre-qualification

In Hong Kong, there is no legislation specifically

Invitation and instruction to
dealing with BOT projects as a group; specific
tenderers
schemes have to be submitted by the government to
the legislative council for approval, and a special
Tendering and evaluation of
ordinance needs to be promulgated for each particu-
tenders
lar scheme. Almost of BOT projects in Hong Kong
are projects in transport sector such as Cross Har-
bour Tunnel (CHT), Eastern Harbour Crossing Negotiation
(EHC), Tate’s Cairn Tunnel (TCT), Western Harbour
Crossing (WHC), and Route 3 Country Park Sec-
Awarding of project
tions (R3CPS). These projects were awarded through
competitive tendering even either solicited or unso- Figure 1 Stages in a BOT competitive procurement
licited projects. procedure

Unlike Hong Kong, the Philippines have passed the The overview of BOT competitive procurement pro-
BOT Law in 1990, the first of its kind in Asia. Then, cedure in Hong Kong and Philippines are summa-
in 1994, the BOT Law was revised for increasing of rized in Table1.
the number of variants to 14 variants of the BOT
scheme. To date, there are 70 BOT projects in energy,
telecom, transport, and water and sewerage sector
(PPI database). Following the BOT Law, the BOT
Table 1 Overview of BOT competitive procurement procedure in Hong Kong and Philippines
Stages HONG KONG PHILIPPINES
Project identifi- Government Agencies Government Agencies
cation Unsolicited Proposals Unsolicited Proposals (many)
Committee Financial and General Panel Agency officer; legal, technical, financial,
Land and Engineering Panel and management officers; private sector,
Traffic and Transportation Panel Commission Audit, BOT center, local rep-
resentatives
Tender docu- (1) to explain the government’s general (1) instruction to bidders such as general
ments requirements with respect to the project description and objectives of the project,
and the franchise, and to provide relevant contractual arrangement, and evaluation
information; (2) to provide guidance in method and evaluation criteria; (2) mini-
the preparation of tenders and explain the mum design, performance stan-
tender evaluation criteria; and (3) to set dard/specification, and economic parame-
out in detail the government’s require- ters; (3) draft contract; and (4) bid form.
ments in design, construction, operation,
and maintenance concerning the project
and the franchise
Pre-qualification N/A Prequalification with legal requirement,
experience or track record, and financial
capability
Invitation ten- All interested tenderers Pre-qualified tenderers
derers
Tendering and Single stage, one envelope procedure Single stage, two-envelope procedure
Evaluation Sealed-bid Selaed-bid
Tenderers can submit more than one pro- Tenderers can only submit one proposal
posals
Kepner-Tregoe evaluation method Two-envelope evaluation method
Key evaluation criterion is lowest tariff Key evaluation criteria and franchise pe-
(franchise period fixed, 30 years) riod depend the nature of project
Negotiation Negotiate with preferred tenderer(s) N/A
Awarding pro- Project Ordinance Project Agreement
ject
Unsolicited pro- Submit to competitive tendering Swiss challenge
posals treatment

3. PROJECT IDENTIFICATION good example with a thorough and effective process

being led by the Government. Such as in transport
Commonly, the projects are identified by the Gov- sector, there are a series of Comprehensive Trans-
ernment Agencies. Hong Kong’s BOT projects are portation Studies, updated every five years. These
determine future strategy as well as future projects.
Projects can also be identified by the private sector,
unsolicited projects, but almost of BOT projects in
Hong Kong are solicited projects. However, one
main issue with Hong Kong’s project identification
is a lack of suitable projects for future BOT projects.
Past experience of BOT tunnel projects indicates that, Commission Against Corruption (ICAC) which has
if the present toll systems and free routes are main-
tained, such as R3CPS has two alternative routes –
the Tuen Mun Road and the Yuen Long Highway –
which are free, the private sector may have little in-
terest in new BOT highway or tunnel projects. This
issue requires the Hong Kong government identify
the future BOT project based on a Long-term master
plan.
In Philippines, implementing agencies (ministries,
local governments, and government owned and con-
trolled corporations) designate the projects that cor-
respond to the government’s medium-term public
investment programs as “priority projects”. The pro-
jects will be then submitted to the relevant develop-
ment council – according to project cost. One issue
in Philippines’ project identification is because im-
plementing agencies, especially local government,
often lack experience in carrying out feasibility
studies, they often welcome unsolicited proposals in
which private sector entities have already done it for
them, particularly in the power sector. The main is-
sues against unsolicited projects are the lack of com-
petition.
The treatment of unsolicited projects in Hong Kong
and Philippines will be discussed in further section.
The lesson experience in this stage is that govern-
ment should carefully prepare the project to attract
private investors by BOT scheme.
4. CREATION OF A PROCUREMENT COM-
MITTEE
Generally, one agency will be established by gov-
ernment to conduct the procurement of BOT project.
In Hong Kong, the tender process will be monitored
by the Central Tender Broad and the Independent
played a major role over many years in minimizing
corruption levels in Hong Kong. To evaluate the
tender proposals, in case of transport sector, the gov-
ernment setups a tender evaluation committee, which
is under leadership of the Secretary for Transport and
includes three panels: financial and general, land and
engineering, and operation and transportation. Mem-
bers of each panel come from relevant government
policy branches and departments that are assisted by
legal, technical, and financial consultants where ap-
propriate. Each panel is responsible for its own area
of expertise assesses whether the submitted tender
proposals can meet the government’s requirements.
In Philippines, one Pre-qualification, Bids and
Awards Committee (PBAC) will be created as re-
quirement in BOT Law including one chairman is at
least a third ranking officer of the Agency; the mem-
bers who are legal, technical, financial, and man-
agement officers; and other observers from private
sector, Commission on Audit, BOT center, and local
agency.
5. PREPARATION OF TENDER DOCU-
MENTS
Good experience in preparation of tender documents
from Hong Kong and Philippines is well standardi-
zation of tender documents by government agencies.
In Hong Kong, the government agencies have pre-
pared a detailed project brief as part of tender docu-
ments to provide usefully and clearly information to
tenderers: (1) to explain the government’s general
requirements with respect to the project and the fran-
chise, and to provide relevant information; (2) to
provide guidance in the preparation of tenders and
explain the tender evaluation criteria; and (3) to set
out in detail the government’s requirements in design, must be passed the legal requirements, experience or
construction, operation, and maintenance concerning
the project and the franchise.
In Philippines, the tender document and the draft of
project agreement have been also prepared to pro-
vide tender information to potential tenderers. In
general, the Philippines tender documents provide to
potential tenderers the following: (1) instruction to
bidders such as general description and objectives of
the project, contractual arrangement, and evaluation
method and evaluation criteria; (2) minimum design,
performance standard/specification, and economic
parameters; (3) draft contract; and (4) bid form.
6. PRE-QUALIFICATION AND INVITATION
TO TENDERERS
In Hong Kong, it is not the practice to carry out pre-
qualification of BOT tenderers. The invitation to
tender for a BOT project is announced in the news-
papers and interested tenderers are generally given a
period of 3-4 months to prepare detailed submissions. Kong government first issued a request for expres-
The reason to cancel the pre-qualification stage in
Hong Kong, as the explanation of Tiong and Alum
(1997), because the government believe that the
scale of investments required for BOT projects and
the keen competition will deter small companies
from submitting proposals. Instead, it will attract
only serious promoters who are financially strong.
In practice, the evidence from Hong Kong’s experi-
ence is that the tender have attracted very strong
concessionaires and contractors – giving Govern-
ment confidence that they will deliver on the very
demanding projects offered (ADB 2000).
Unlike Hong Kong, Philippines government require
the pre-qualification to shortlist the potential tender-
ers. To participate the tender, the interested tenderers
track record, and financial capability required in
BOT Law. Only the pre-qualified tenderers will be
invited to submit the proposals.
Lesson experience from Philippines as well as rec-
ommendation from guidelines (UNIDO 1996, WB
1998) is that the government should use prequalifi-
cation stage to limit the total number of prequalified
tenderers to a shortlist of three or four, because the
costs associated with more tenderers often exceed
the benefits of additional competition. A large num-
ber of bidders reduces the chances each has of win-
ning the bid and hence discourages investment in the
preparation of proposals. More bidders also raise
costs to government since officials and their advisers
will usually face more requests for clarification or
additional information, and more bids will have to be
evaluated.
In Hong Kong, starting from R3CPS project, there
was a little change in tendering process in that Hong
sion of interest, and then issued a detailed project
brief only to the interested parties.
7. TENDERING AND EVALUATION OF
TENDERS
7.1 Tendering
In the two countries, tenderers are typically given 4
months to submit their bids. At the time of open bid-
ding, Hong Kong and Philippines use the same
sealed-bid procedure. This procedure usually uses by
other government than the other that is open bids or
voice auction. The World Bank Guidelines (1998)
given the reasons to use this procedure that are: first,
collusion between bidders is generally considered to
be less likely with sealed bids than voice auctions;
under a sealed-bid procedure, bidders' defections
from collusive agreements (that is, the submission of
bids above the colluded price) are harder for others
to prevent than under voice auctions; and second, if
bidders are inexperienced, they may be less likely to
correct for the winner's curse under a sealed-bid with
the result that the sealed-only bid procedure may
actually yield a higher price under these circum-
stances.
Hong Kong and Philippines also use the same single
stage of tendering. However, while Hong Kong uses
one-envelope procedure – technical and financial
proposal in one sealed envelope, Philippines use
two-envelope procedure, the first is technical enve-
lope and the second is financial envelope. Therefore,
in Philippines the prequalified tenderers must submit
their bids in 2 separate sealed envelopes, the first
being the technical proposal and the second being
the financial proposal. At the date and time of bid
opening, the technical proposal envelope will be
opened and then evaluated. Once the tenderers who
have qualified for the financial evaluation have been
determined, they will be notified the date and time of
the opening of the financial proposal envelopes.
To encourage the innovation of private sector as well
as the competition in tendering, Hong Kong gov-
ernment permits the tenderers to submit more than
one proposal while BOT Law does not allow that.
7.2 Evaluation Method
Based on past BOT experience, the Hong Kong gov-
ernment has formulated the Kepner-Tregoe deci-
sion-making method that has been used in the recent
projects. This method includes the following deci-
sion stages: formulating a “decision statement,”
identifying and weighting decision alternatives (in
terms of “MUST” and “WANT” criteria), generating
alternatives, evaluating alternatives against the
MUST and WANT criteria, and selecting the most
suitable alternative. The decision statement provides
the focus for the following steps and sets limits in
the selection. The MUST and WANT criteria identify
specific requirements of the decision. The MUST
criteria function as a screen to eliminate fail-
ure-prone alternatives by a “Yes-or-No” judgment.
Then, the remaining alternatives will be judged in
their relative performance against WANT criteria.
The WANT criteria give the evaluator a comparative
picture of the remaining alternatives.
To evaluate the tenders, the Kepner-Tregoe method
also incorporates the evaluation methods of binary
decision, simple scoring system, and multiattribute
analysis.
Zhang et al (2005) indicated that Kepner-Tregoe is a
suitable method that can be adapted for competitive
tendering of BOT projects although this method is
more complicated than other evaluation methods
such as simple scoring method, NPV method, or
even the multiattribute analysis. It takes time and
effort to determine appropriate decision statement,
MUST/WANT criteria, and the relative importance
of the WANT criteria.
In Philippines, another evaluation method that is
two-envelope method has been used to evaluate the
tender proposals as requirement of BOT Law. This
method includes two stages. The fist envelope
evaluation involves the assessment of the technical,
operational, environmental, and financing viability
of the proposal as contained in the bidders’ first en-
velops vis-à-vis the prescribed evaluation criteria in
the bidding documents. The second envelope evalua-
tion involves the assessment and comparison of the
financial proposals of the bidders based on the
evaluation stated in bidding documents.
The main advantage of the two-envelope method is
simple to apply. This method is also recommended to
evaluate the BOT tendering by the Work Bank
Guidelines (1998). Zhang et al (2004) mentions the
two-envelope method as an appropriate method for
tender evaluation of small and simple BOT projects.
One characteristic of BOT projects is that financial
aspects are the most important issue that needs to be
considered in tender evaluation for BOT projects.
Hence, the financial package is usually assigned a
much higher weight than other evaluation packages.
The two-envelop, therefore, will be more effective
when is combined with NPV method.
7.3 Evaluation Criteria
Hong Kong government normally listed the evalua-
tion criteria for BOT projects in brief project. The
main evaluation criteria have been used as below:
a. The level and stability of the proposed toll regime
b. The proposed methodology for toll adjustments
c. The robustness of the proposed works program
d. The financial strength of the tenderer and its
shareholders, their ability to arrange and support
an appropriate financing package, and the re-
sources they are able to devote to the project
e. The structure of the proposed financing package
including the levels of debt and equity, hedging
arrangements for any interest rate and/or currency
risks, and the level of shareholders’ support
f. The proposed corporate and financing structure
of the franchisee
g. The quality of the engineering design; environ-
mental considerations; construction methods, in-
cluding traffic control, surveillance, and tunnel;
electrical and mechanical installation; and venti-
lation and lighting systems
h. The ability to manage, maintain, and operate ef-
fectively and efficiently
i. Benefits to the government and community
The key evaluation criterion for Hong Kong’s BOT
projects is lowest tariff. It is noted that the franchise
period was not considered a criterion since it was
predetermined (30 years).
With this key evaluation criterion, the Hong Kong
government and the users have the benefits from the
low tariffs. However, there are problems form the
competition created by the cheaper tolls such as the
case of CHT projects. The cheaper tolls than that of
the subsequent projects in this project have affected
the successful of the subsequent projects. The user
interests in low tariffs and always uses the CHT,
therefore, the traffic and also the revenue in the sub-
sequent projects are lower than forecast.
To reduce the franchisee’s financial risks and en-
courage private involvement in future BOT projects,
the Hong Kong government are considering a ‘‘re-
verse tender’’ system which has been practiced in the
United Kingdom. In this system, the government sets
up toll levels in phases during the franchise period,
provides a certain amount of reserve fund during the
selection of the tender, and asks the tenderer to offer
what it can do for the project. In its proposal, the
tenderer specifies what portion of the reserve fund it
needs. From the government’s point of view, the less
the amount of public money requested by the ten-
derer the more preferable its proposal. The tender is
evaluated against this ‘‘less public money require-
ment’’ among other criteria. The actual public money
requested by the winning tenderer becomes govern-
mental equity, and the government shares corre-
sponding risks and benefits (Zhang and Kumaras-
wamy 2001).
Unlike Hong Kong, as above mention, Philippines
government uses the two-envelop method for BOT
tender evaluation, therefore, the evaluation are de-
pended the evaluation stage.
The evaluation criteria for the fist stage are technical
soundness, operational feasibility, environmental
standards, project financing, and enhancements. The
evaluation criteria for the second stage normally in-
clude one ore more of the following criteria: the low-
est proposed toll, fee, rental or charge at the start of
project operation; the lowest present value of pro-
posed toll, fee, rentals and other charges for the pe-
riod covered by the contract; the lowest present
value of government subsidy to be provided for the
period covered by the contract; and the highest pre-
sent value of proposed payments to government such
as concession fee, lease payments.
The evaluation criteria in the second stage are the
key evaluation criteria. Therefore the key evaluation
criteria will be affected by the nature of project or
contract.
8. NEGOTIATION
Philippines’ BOT competitive procurement proce-
dure is not including the negotiation stage. After the
financial evaluation, one tenderer will be selected as
the winning tenderer to sign the contract for the pro-
ject with the Agency.
Unlike Philippines, Hong Kong’s BOT competitive
procurement procedure is including the negotiation
stage. After the tender evaluation, the government
may shortlist to a few tenderers to seek further clari-
fication, detailed evaluation, and negotiation, and
may require the shortlisted tenderers to submit a
draft construction contract, designer’s appointment
agreement, checker’s appointment agreement, and
relevant warranty agreements for review.
During the negotiation stage, the shortlisted tender-
ers are required to have all the necessary expertise
and personnel readily available for prompt responses
to queries, requests for information, clarifications,
submitting revised proposals, and participating in
negotiations. Tender assessments are updated as the
negotiation process proceeds and follows tenderers’
submission of revised proposals. Once the final as-
sessment is completed the executive committee of
the Hong Kong Special Administrative Region Gov-
ernment is asked to endorse the selection of the pre-
ferred tenderer for further negotiations on the final
terms and conditions of the project agreement, and
for the draft of the enabling ordinance.
The evidence from Hong Kong’s experience is that
the negotiations have resulted in major reductions in
bid prices and most conflicts between concession-
aires and governments have been resolved through
negotiation.
9. UNSOLICITED PROPOSALS TREAT-
MENT
As above mention, Hong Kong and Philippines gov-
ernment also accept the unsolicited projects and the
main issues against unsolicited projects are the lack
of competition.
To resolve this issue, after the approval of the unso-
licited project, the Hong Kong government has pub-
lished the project to call the competitive tendering.
An example of this solution is the EHC project. After
the proposal of Kumagai Gumi was received and
accepted, the competitive tendering has been issued
by the government of Hong Kong. There were then
nine tenderers including Kumagai Gumi participat-
ing the tendering.
Unlike Hong Kong, the Philippines government
wants to overcome this issue by the way of the Swiss
challenge or price test (WB 1998): “the agency
awarding the project must invite comparative pro-
posals to any unsolicited proposal it has received.
The invitation to tender must be published in a
newspaper of general circulation for at least three
weeks. The published invitation must inform poten-
tial bidders where to obtain tender documents, how-
ever, proprietary information contained in the origi-
nal proposal is confidential and may not be disclosed
in the tender documents. Competitors have 60 days
to submit competitive proposals. If a lower-priced
proposal is received, the original proponent has 30
days to match it and win the contract. Otherwise, the
award goes to the lower bidder.” In theory, it is good
solution, however, in practical it is ineffective. One
main reason for this ineffectiveness from potential
tenderers is that period of time to submit other pro-
posals is short; 60 days are not enough to prepare
one proposal. The expert recommendation is that
challengers should be given s long time as the exten-
sion of the challenge period from 60 to 120 days
(PIDS 2002).
10. CONCLUSION
The paper conducted through comparative examina-
tion of Hong Kong and the Philippines practical im-
plementation in competitive procurement procedures
of BOT projects led the following recommendation
to be considered when formulating or revising the
BOT procurement systems.
First, the project identification should be carefully
prepared by the government. A good project could
attract the strong private investors to participate in
infrastructure, and give the benefits to the private
investors as well as the government and the users.
Hong Kong’s experience indicated that some current
BOT projects such as TCT and WHC are in trouble
because of the not good planning in system of toll
road and government-tolled.
Second, clear statement of criteria and procedures in
each process is recommended. The good example for
that is Philippines’s BOT Law. It clearly provides the
details of the processes and of the responsibility of
each related authority in project identification and
tendering.
Third, a transparent and competition tendering proc-
esses should be conducted. This issue has been con-
firmed by Hong Kong’s experience through their
implementation in BOT tunnel projects.
The last, the government should consider special
procedures to handle unsolicited proposals that may
result form a private sector’s identification of an in-
frastructure need it can satisfy. Unsolicited proposals
may also facilitate innovative concepts in term of
technology, finance, and management. The Philip-
pines’ “Swiss challenge” could become appropriate
solution but it should be revised as recommenda-
tions.
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